Key Takeaways: With the recent IRS announcement of higher gift and estate tax exemptions for 2025, and the sunset of the lifetime exemption on the horizon, now is the time to consider how these changes may impact your overall estate and financial plan and implement plans to optimize your strategy.

Inflation Adjustments for Gift and Estate Tax Exemptions

The Internal Revenue Service recently announced the inflation adjustments for gift and estate tax exemptions for 2025. 

The annual gift tax exclusion will be $19,000 per recipient in 2025, an increase from the $18,000 annual gift tax exclusion for gifts made in 2024.

The combined gift and estate tax lifetime exemption will be $13.99 million per individual for lifetime gifts made in 2025 and for bequests made by a person who passes away in 2025. This reflects a $380,000 increase from the 2024 lifetime exemption amount of $13.61 million. Based on the new exemption amount, a married couple may transfer a total of $27.98 million without having to pay any federal gift or estate tax. For a couple who has already maxed out their lifetime gifts, the increase means they may now give away another $760,000 in 2025.

Annual Gift Tax Exclusion

Each year, the IRS sets the annual gift tax exclusion, which allows a taxpayer to give a certain amount (in 2025, $19,000) per recipient tax-free without using any of the taxpayer’s lifetime gift and estate tax exemption. For married couples, this means that they may give a combined $38,000 per year per recipient beginning January 1, 2025.

As an example, if a married couple has two children and three grandchildren, they may transfer $190,000 in 2025 to their descendants without touching their combined $27.98 million lifetime gift tax exemption.

Lifetime Estate and Gift Tax Exemption – Sunset on the Horizon

A taxpayer who wants to gift more than the annual gift tax exclusion to one or more donees will use a portion of his or her lifetime gift tax exemption (in 2025, $13.99 million) to avoid paying a wealth transfer tax. The gift and estate tax exemption is “unified”, or combined, meaning that the use of one’s gift tax exemption will reduce the amount he or she may leave at death estate-tax-free.

A taxpayer who makes gifts in excess of the annual gift tax exclusion must file a gift tax return, due April 15 in the year following the gift, to report the gift and track the amount of lifetime exemption that he or she has used.

Although the IRS has announced that the lifetime estate and gift tax exemption will increase to $13.99 million in 2025, the law creating the exemption is set to “sunset” (revert to prior law) on January 1, 2026 unless further legislation is enacted during 2025. If Congress fails to act by the beginning of 2026, the lifetime estate and gift tax exemption amount will be cut in half.

Planning Opportunities

Clients may take advantage of the increased exemption amounts by making lifetime gifts, either outright to an individual or for the benefit of an individual through a trust. With the potential sunset of the historically high lifetime exemption amount on the horizon, clients should consider making these gifts as soon as possible.

For those who have fully used their combined gift and estate tax exemption in prior years, the increase from 2024 to 2025 provides an opportunity to make additional lifetime gifts to avoid or reduce estate tax.

Should you have questions about optimizing your estate planning strategy or need assistance in maximizing the benefits of the increased exemption amounts, our attorneys are here to help. Explore our Estate Planning Services page to learn more about our comprehensive offerings and how we can assist you.  For personalized guidance, feel free to contact a member of our team directly.

_{This content is made available for educational purposes only and to give you general information and a general understanding of the law, not to provide specific legal advice. By using this content, you understand there is no attorney-client relationship between you and the publisher. The content should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.}